Sept. 4 (Bloomberg) -- Russia’s central bank chairman
signaled policy makers may embark on an easing cycle for the
first time in almost two years as a slowdown in inflation opens
the door to measured interest-rates cuts.

“As inflation slows, the central bank may begin a gradual
reduction in interest rates on its operations,” Elvira
Nabiullina said in an interview with the state-run Itar-Tass
news service published yesterday. “Low inflation is one of the
elements of a favorable investment climate. So the central
bank’s task is to provide for low inflation.”

Nabiullina, 49, who took over as central bank chairman in
June, is grappling with the worst economic slowdown since
Russia’s 2009 recession, compounded by inflation that has
remained above this year’s target for 11 months. The
deceleration in growth is primarily driven by domestic factors,
and is related to underlying issues with the economy rather than
fluctuations in the business cycle, she said.

The bank left its main lending rates unchanged for an 11th
month on Aug. 9 with inflation above its target range of 5
percent to 6 percent. Cutting rates raises risks of faster
inflation as well as capital outflows, according to Nabiullina.
The Economy Ministry’s estimate for 2013 net private capital
outflows of $70 billion to $75 billion is close to the central
bank’s forecast, she said.

‘Very Difficult’

“The situation is very difficult and the decline in
economic growth is a concerning trend,” Nabiullina said. While
relaxing monetary policy may “ease the pain” in the short
term, it wouldn’t help bolster growth in the longer run.

The Economy Ministry downgraded its forecast for this
year’s growth rate to 1.8 percent, compared with a 2.4 percent
projection in April, Deputy Economy Minister Andrei Klepach said
last month. Gross domestic product expanded 1.2 percent from a
year earlier in the second quarter, extending the slowdown to 1
1/2 years.

Analysts are almost evenly divided over whether Bank Rossii
will cut the overnight auction repurchase rate from 5.5 percent
at its next meeting, with 10 forecasting no change, according to
a Bloomberg survey of 19 economists. The rest predict a quarter-point cut at the monetary-policy meeting scheduled for Sept. 13.

The three-month MosPrime rate, which large Moscow banks say
the charge one another, may drop 19 basis points in the next
three months, according to forward-rate agreements tracked by
Bloomberg. That’s down from 56 basis points, or 0.56 percentage
point, Aug. 19.

‘Key Indicators’

“There needs to be a low inflation rate, a low budget
deficit, and low state debt levels,” Nabiullina said. “Those
are the key indicators for macroeconomic stability, which create
the conditions for economic growth.”

The comments were confirmed by phone yesterday by the
bank’s spokeswoman, Anna Granik.

Russia is set to meet this year’s inflation target thanks
in part to a favorable trend in food prices, she said. Price
growth decelerated in July to an eight-month low of 6.5 percent
from a year earlier.

The annual inflation rate eased to 6.4 percent in August,
according to the median estimate of 22 economists in a Bloomberg
survey. Consumer prices were probably unchanged from the
previous month, according to the median of a second survey. The
Federal Statistics Service in Moscow may report the data today
or tomorrow.

Inflation Goal

The regulator plans to target a 4.5 percent level next year
while allowing itself a tolerance range of 1.5 percentage points
on either side, Nabiullina said. The middle of the range would
drop to 4 percent in the following two years.

Those plans are dependent on the government following
through with limits on tariff increases, she said. President
Vladimir Putin told an investor forum in June that he planned to
cap tariff growth for companies such as OAO Gazprom to the
previous year’s inflation rate.

Russia’s government will have to be more careful with its
spending as the economy grows more slowly, reducing budget
revenue, Putin said in an interview with the Associated Press
and Russian state television broadcaster Channel One, a
transcript of which was posted on the Kremlin website today.

“I think that there will have to be some cutbacks
somewhere,” Putin said. “Those proposals should come from the
government as it works on the budget.”

Bank Rossii plans to continue moving toward a free floating
ruble as it seeks to begin formal inflation targeting, according
to Nabiullina.

“We’ll have to allow stronger fluctuations in the
currency, but in my view, the benefits from that are greater,”
she said.